The Australian market outperforms

The talking point on the floor today has been firmly around the outperformance of the Australian market, despite a slightly weaker lead from the S&P, a flat day’s trade in China and a softer Nikkei.

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Chris Weston

2013-09-25T05:28:50+0100

US futures are not finding any buyers either and clients haven’t really started to express any real bias on our out-of-hours European markets. In this regard it really feels as though a number of risk assets are in limbo, awaiting clarity; comments from US Treasury Secretary Jack Lew won’t have helped either when he said that ‘market calm over the debt limit is greater than it should be’. Still, the market continues to give the fiscal issues in the US the benefit of the doubt that a short-term fix will be found and this can could be kicked down the road.

The ASX 200 is up 0.8% and there has been buying right from the outset, as opposed to a strong unwind and lethargic price action. There is even reasonable volume to accompany the move. The question of what has driven the flows is interesting and while there is no smoking gun, we see a few quite plausible factors at play.

David Jones results

Firstly, retailer David Jones (DJS) has pleased investors and traders, although the result doesn’t seem to justify a 6.2% rally. Full-year NPAT (pre-NRI) was 3.6% above consensus, although this was a function of a lower tax rate, while earnings momentum improved in the second half. Gross margins improved 81 basis points, which was lower than expected and offset by an anticipated rise in the cost of doing business. Clearly short covering has played a part, given there was still A$56 million of short interest in the name. A technical break-out is underway in the name, however comments that the ‘consumer remains cautious’ and that it ‘expects the next twelve months trading conditions will remain challenging’ are hardly inspiring. Therefore it’s hard to make a case that this earnings report has done anything to the overall market and should be seen as an isolated issue, especially as rival Myer is up only 1.3%.

Aussie banks

The fact that Aussie banks are the backbone behind the rallies points is of most interest, as there was very little (if any) information that would push these names up between 0.5% and 1.5% and we certainly weren’t expecting this from the leads. Flows into quarter-end have been talked about, while some have spoken about the falls in real rates, with Australian ten-year bond falling two basis points to 3.87%, while we are once again seeing the US ten-year treasury once again testing the 2007 downtrend at 2.65%. Falling real rates is clearly a positive for the yield plays and therefore this is a plausible explanation. There have also been reports of a second day of ‘unusually large’ demand from US real money funds (custodial funds) for Australian equities, although unless all other institutional desk were selling yesterday, the US funds didn’t seem to have much influence.

It seems logical then that some of these domestic institutional funds would have caught wind of the orders after market yesterday and simply stood aside today, knowing full well they can get their sell orders away at better levels. Again this is market talk, but given the outperformance today, it does make sense.

Flows on the FX side have been pretty lacklustre today , with some further position adjustment in AUD/NZD, after the poor Kiwi trade balance print earlier. The RBA’s stability report didn’t really cause too much of a reaction, although it has thrown up further debate around Australian housing or more so Sydney. Clearly this is an area that the RBA is really looking at quite closely, although we don’t sit in the camp that it sees certain areas as bubbles, and is quite happy to signal to traders and investors that it is watching proceedings.

Ahead of the European open

European markets won’t be affected by the Australian market and the open could be more affected by the remaining US cash session and US and FTSE futures during Asian trade. These are in turn are affected by price action in the Nikkei, Heng Seng and to a lesser degree CSI 300 (Chinese market), and as previously stipulated these markets haven’t seen anywhere near the same amount of love as the ASX 200.

There is a large amount of data to watch out for including consumer confidence in Germany and Italy, business confidence in France, while in the US we get August durable goods and new home sales. It could be interesting to keep an eye on the $33 billion two-year bond auction, given yesterday’s poor four-week bill auction where the bid-to-cover fell from 4.91x to 4.16x. Who really wants to lend to the US Treasury if you were convinced it was going to default? We don’t see that happening, but it seems Treasury will be keen.

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